How Credit Cards Can Perpetuate Racial Disparities in Wealth

Credit cards offer a lot of convenience to consumers, creating a massive billion-dollar industry. Despite the success and benefits of credit cards, a major drawback in their design is their contribution to racial disparities in wealth.  

The Wealth Gap 

Wealth inequality has grown in recent years, resulting in the rich accumulating more wealth and the working class accumulating less. Wealth inequality is caused by a number of factors, such as stagnant wages, worsening inflation, and systemic racism. Systemic racism is a form of racism that is perpetuated by the laws and regulations that govern our society. This broadly includes employment and the criminal justice system. Racial discrimination in employment is very common as well as in the criminal justice system and it disproportionately impacts people of color. This all contributes to the wealth gap. In 2016, the median white American family had ten times the wealth of the average Black American family. 

The Role Credit Cards Play 

The introduction of the credit score gave financial institutions insight into how responsible a consumer is with their spending. If a consumer has a low credit score, they can't take out loans, mortgages, or even find employment in certain jobs. Due to existing inequalities, data has shown it is harder for Black Americans to maintain high credit scores. Black communities are more likely to be impacted by debt-collection lawsuits, which can negatively impact a person’s credit score. Black Americans are also more likely to have their property foreclosed on, which also impacts credit scores.

This problem is a direct result of redlining, a policy where the United States government deliberately created segregated housing zones that made it easier for municipalities to disproportionately fine and tax them. While redlining is considered illegal today, it created extreme racial wealth inequality that still echos today.  

Today, the average Black American’s credit score falls below 700 in comparison to white American’s scores that are in a majority of cases above that. Due to generally lower credit scores, Black Americans deal with higher interest rates on things like student loans and mortgages, further exacerbating inequities. 

What Can Be Done About It? 

There is no easy solution, but there are ways to reduce the adverse impacts that credit scores have on Black Americans. Reforms and regulations are a short-term solution, but systemic racism requires transformative changes to make a lasting impact. Some academics have proposed abolishing credit scores entirely to remove the barrier that prevents poorer Americans from needs like employment and accessibility to loans. While abolishing credit scores may be a pipe dream, there is a growing call to minimize the harm credit scores inflict on economically vulnerable people. 

Credit unions are a great tool for lower-income Americans. There are some minority-owned credit unions that specifically cater to communities that are considered insufficiently banked. Applying to a card that doesn’t pull your credit is also a good option for those who don’t want their credit checked.